Loans against shares provide investors with a mechanism to access liquidity while retaining their equity investments, operating under specific regulatory frameworks and risk parameters. The facility allows borrowers to pledge their share holdings as collateral for credit, with interest charged only on amounts actually utilized.

Application Process and Documentation

The loan application process begins with completing a one-time Know Your Customer (KYC) verification using PAN and Aadhaar details. When Aadhaar is linked to the applicant's mobile number, required information is automatically fetched through DigiLocker. Following KYC completion, shares are pledged using the depository participant ID, with the DP sending confirmation once the pledge is created. Share pledging is permitted only on working days.

After pledging shares, borrowers can access an overdraft facility from the lender. Bank account verification occurs online through an e-mandate, followed by reading and digitally signing the loan agreement to complete the process.

Loan Limits and LTV Ratios

The Reserve Bank of India stipulates a maximum loan-to-value ratio of 50% for loans against shares. This regulatory framework determines the credit limit available to borrowers based on their pledged securities value.

According to Kapil Nagpal, a member of the founding team of Volt Money, "Banks can offer up to ₹1 crore as a loan against shares to an individual, while non-banking financial companies have no such limit."

The LTV ratio varies depending on share quality. Large-cap stocks typically qualify for the maximum permissible LTV of 50%, while small- and mid-cap stocks may receive ratios as low as 30%. Ravi Doshi, business head-secured loans at Mirae Asset Financial Services (India), notes that "Loan-to-value ratios vary across lenders." Mirae Asset Financial Services maintains a base LTV of 45% to build in extra safety margins, with further adjustments based on stock quality.

Interest Rates and Repayment Structure

Loans against shares typically carry interest rates ranging from 9-12% annually. The repayment structure differs significantly from conventional loans, as borrowers are not required to pay EMIs combining principal and interest.

For example, drawing ₹4 lakh at 10% annual interest results in daily interest of approximately 0.03%, translating to roughly ₹3,400 monthly interest payments. Once the principal is fully repaid, pledged shares are released and no further interest accrues.

Risk Management and Margin Calls

Daily LTV revaluation presents significant risks for borrowers, particularly during volatile market conditions. When share prices decline, the LTV ratio can exceed the 50% threshold, triggering margin call requirements.

Consider a scenario where an outstanding loan of ₹4 lakh against ₹8 lakh worth of shares faces a price decline to ₹7 lakh. The LTV ratio climbs to 57%, requiring restoration to 50% through either:

• Loan reduction: Pay ₹50,000 to bring outstanding value to ₹3.50 lakh
• Additional pledging: Pledge ₹1 lakh worth of additional shares

Vinayak Savanur, a SEBI-registered investment advisor and founder of Sukhanidhi Investment Advisors, warns that "For small investors with limited holdings, this can become cumbersome, particularly during volatile market phases, as sharp price swings can frequently push the LTV close to or beyond prescribed thresholds."

Share Liquidation Scenarios

Borrowers can lose their pledged shares under specific circumstances. When the LTV ratio breaches permitted limits and shortfalls are not corrected within stipulated deadlines, lenders can sell pledged shares to recover outstanding amounts.

If the LTV reaches 60% or higher, lenders can liquidate shares immediately without the seven-day waiting period. Additionally, lenders can liquidate pledged shares if borrowers default on interest payments for 60 to 90 days, depending on loan terms and conditions.

Expert Recommendations

Financial advisors recommend loans against shares primarily for short-term requirements. Surya Bhatia, a financial adviser at Asset Managers, explains: "We typically advise clients to use this for short-term needs, especially when the requirement is for less than a year. In such cases, a loan against shares can be a practical alternative to selling equities, which would otherwise trigger capital gains tax and break the long-term compounding benefit of staying invested in stocks."

However, Bhatia cautions against long-term usage: "It is not advisable as a long-term solution. Equities can go through bouts of volatility, even when the portfolio is largely tilted towards large cap stocks. Extending an LAS for longer periods also means that interest costs steadily eat into overall equity returns."

Experts recommend using this facility sparingly and avoiding maximum LTV utilization to prevent frequent margin calls during volatile market conditions.